If a Virginia nonprofit school sets up a single-member LLC to hold property, does that property still qualify for the property-tax exemption for institutions of learning?

Plain-English summary

The Virginia Beach Commissioner of the Revenue asked two questions about a single-member LLC (SMLLC) owned by a nonprofit institution of learning. First, does property owned by the SMLLC qualify for the Code § 58.1-3606(A)(4) property-tax exemption for "incorporated colleges or other institutions of learning not conducted for profit"? Second, are the SMLLC's receipts excluded from BPOL (business, professional, and occupational license) tax under Code § 58.1-3703(C)(18)?

The Attorney General split the answer. For property tax: no. Virginia law treats an LLC as a legal entity separate and distinct from its members (Code §§ 13.1-1009, 13.1-1021). Title to property held by the SMLLC vests in the LLC, not in the LLC's owner. Even when there is only one member, the SMLLC is its own legal person. Article X, § 6 of the Virginia Constitution requires strict construction of tax exemptions, with any doubt resolved against the party claiming the exemption. So if the SMLLC itself does not qualify as an "institution of learning not conducted for profit," it cannot ride on its owner's exemption.

For BPOL tax: a more flexible answer. Domestic SMLLCs are by default "disregarded entities" for federal income tax purposes (26 C.F.R. § 301.7701-2, -3), meaning the IRS treats them as the same as their sole owner. The IRS has issued guidance (Notice 2012-52) that contributions to a disregarded SMLLC wholly owned by a U.S. charity are treated as contributions to the charity. The AG concluded that the same logic applies to Virginia BPOL tax exclusions: the receipts of a disregarded SMLLC should be treated as receipts of its sole nonprofit member and are excluded from BPOL tax to the extent permitted by Code § 58.1-3703(C)(18). Whether and to what extent any particular SMLLC's receipts qualify is left to the local Commissioner's determination.

Currency note

This opinion was issued in 2019. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Code § 58.1-3606(A)(4) exempts from state and local taxation property owned by "incorporated colleges or other institutions of learning not conducted for profit" and used primarily for "literary, scientific or educational purposes or purposes incidental thereto." The Virginia Constitution authorizes this exemption in Article X, § 6(a)(4) but expressly requires that tax exemptions be strictly construed (Article X, § 6(f)). The Supreme Court of Virginia has reinforced this in Smyth County Community Hospital v. Town of Marion: exemptions are the exception, and doubts go against the party claiming the exemption.

The Virginia Limited Liability Company Act (Code §§ 13.1-1000 to -1087) treats an LLC as a separate legal entity. Section 13.1-1009 gives the LLC the power to own property, and Section 13.1-1021 vests title to property acquired by the LLC in the LLC itself, not its members. Hagan v. Adams Property Associates and Jordan v. Commonwealth both confirm the separateness. The federal court in Jeb Stuart Auction Services put it bluntly: "The LLC structure would have no meaning if single-member LLCs were one and the same with the single member."

The BPOL tax framework in Code § 58.1-3703(C)(18) excludes from license fees and taxes the receipts of certain nonprofit organizations. Subdivision (a) excludes receipts of § 501(c)(3) and § 501(c)(19) nonprofits to which contributions are deductible under § 170 (limited for educational institutions to "schools, colleges, and other similar institutions of learning"). Subdivision (b) excludes "gifts, contributions, and membership dues" of other § 501 nonprofits. The treatment of a disregarded SMLLC depends on its federal income-tax classification: by default, an SMLLC is disregarded under 26 C.F.R. § 301.7701-3, and its income flows through to its sole owner. IRS Notice 2012-52 treats contributions to a disregarded SMLLC owned by a U.S. charity as contributions to the charity.

Common questions

Why isn't the SMLLC's property exempt if the sole owner is a qualifying nonprofit?
Because the property belongs to the SMLLC, not to the nonprofit. Virginia treats LLCs as separate legal entities even when they have one member. The exemption tests who owns the property and whether that owner qualifies; here, the owner is an SMLLC that does not independently qualify.

Could the nonprofit hold the property directly to claim the exemption?
Yes, that approach is usually consistent with § 58.1-3606(A)(4). Nonprofits typically hold property in their own name precisely because it preserves the tax exemption. The SMLLC structure was presumably chosen for liability-shielding reasons, but it carries a cost on the property-tax side.

Why does the BPOL answer go the other way?
Because the BPOL exclusion turns on the nature of receipts, and federal income tax law treats a disregarded SMLLC's receipts as the owner's. The IRS and the AG reach this result by treating the SMLLC as transparent for income/receipts purposes, while it remains opaque for property-ownership purposes. The two questions look similar but apply different doctrines.

What about an SMLLC that elects to be classified as a corporation for federal income tax?
Then it is no longer a disregarded entity, and the BPOL flow-through analysis does not apply. The SMLLC would be treated as a separate taxpayer, and its receipts would not be treated as receipts of the nonprofit owner.

Does this affect older property held by nonprofits in LLC form?
The opinion flags a possible grandfather clause: property exempt as of the effective date of the 1971 Virginia Constitution under § 58-12 (predecessor to § 58.1-3606) may be grandfathered with liberal construction. But the General Assembly didn't authorize LLCs until well after 1971, so SMLLCs cannot rely on the grandfather rule.

Who decides whether a specific SMLLC's receipts qualify for BPOL exclusion?
The local Commissioner of the Revenue, on the facts of each case. The AG declined to determine whether any particular SMLLC's receipts qualify. The Commissioner must apply Code § 58.1-3703(C)(18) to the SMLLC's actual receipt profile, the nature of the activities, and whether the activities are similar to those of for-profit businesses (which carries a different presumption).

Citations

• Va. Code § 58.1-3606(A)(4) (institution of learning exemption)
• Va. Code §§ 13.1-1009, 13.1-1021 (LLCs as separate entities; property vesting)
• Va. Code § 58.1-3703(C)(18) (BPOL exclusions for nonprofits)
• Va. Const. art. X, § 6 (tax exemption authority and strict construction)
• 26 C.F.R. § 301.7701-2, -3 (disregarded entity classification)
• IRS Notice 2012-52 (contributions to SMLLCs of U.S. charities)
• Smyth Cty. Cmty. Hosp. v. Town of Marion, 259 Va. 328 (2000)
• Jeb Stuart Auction Servs., LLC v. W. Am. Ins. Co., 122 F. Supp. 3d 479 (W.D. Va. 2015)

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2019/18-027-Kellam-issued.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Mark R. Herring
Attorney General

August 9, 2019

The Honorable Philip J. Kellam
Commissioner of the Revenue for Virginia Beach
City Hall Building 1
2401 Courthouse Drive
Virginia Beach, Virginia 23456

Dear Commissioner Kellam:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of
the Code of Virginia.
Issues Presented
You ask whether property owned by a single member limited liability company (SMLLC) is
eligible for tax exemption by classification pursuant to § 58.1-3606(A)(4) if the sole owner of the
SMLLC is a non-profit corporation that operates as an institution of learning. You further inquire whether
the receipts of the same SMLLC could be excluded from business, professional, and occupational license
(BPOL) taxes pursuant to § 58.1-3703(C)(18).[1]

Applicable Law and Discussion
Pursuant to § 58.1-3606 of the Code of Virginia, property owned by "incorporated colleges or
other institutions of learning not conducted for profit" and used primarily for "literary, scientific or
educational purposes or purposes incidental thereto" generally is exempt from state and local taxation.[2]
Under Virginia law, a limited liability company (LLC) is a legal entity separate and distinct from its
members.[3] It has the power to own property,[4] and title to any property acquired in the name of the LLC
vests in the LLC.[5] This separate legal status exists even if there is only a single member of the LLC.[6]
Thus, title to property vested in an SMLLC is not owned by its member.

Additionally, Article X, § 6 of the Constitution of Virginia provides that tax exemptions
established or authorized in that section shall be strictly construed.[7] As a general rule, "an exemption from
taxation is the exception and provisions exempting property from taxation must be strictly construed."[8]
Any doubt concerning an exemption "must be resolved against the party claiming the exemption."[9]

For the above reasons, I am of the opinion that property that is owned by an SMLLC that does not
independently qualify as an "institution of learning not conducted for profit" is not eligible for tax
exemption by classification under § 58.1-3606(A)(4), notwithstanding that the sole owner of the SMLLC
is a non-profit corporation operating as an institution of learning.

With regard to your second inquiry, § 58.1-3703(C)(18) prohibits a county, city, or town from
imposing a license fee or levying any license tax:

a. On or measured by receipts of a nonprofit organization described in Internal Revenue
Code § 501(c)(3) or 501(c)(19) except to the extent the organization has receipts from an
unrelated trade or business the income of which is taxable under Internal Revenue Code
§ 511 et seq. For the purpose of this subdivision, "nonprofit organization" means an
organization that is described in Internal Revenue Code § 501(c)(3) or 501(c)(19), and to
which contributions are deductible by the contributor under Internal Revenue Code
§ 170, except that educational institutions exempt from federal income tax under Internal
Revenue Code § 501(c)(3) shall be limited to schools, colleges, and other similar
institutions of learning.

b. On or measured by gifts, contributions, and membership dues of a nonprofit
organization. Activities conducted for consideration that are similar to activities
conducted for consideration by for-profit businesses shall be presumed to be activities
that are part of a business subject to licensure. For the purpose of this subdivision,
"nonprofit organization" means an organization exempt from federal income tax under
Internal Revenue Code § 501 other than the nonprofit organizations described in
subdivision a.[10]

Unless the SMLLC itself qualifies as one of the types of "nonprofit organizations" defined in
subdivisions (a) and (b) above, a determination must be made as to whether all or a portion of its receipts,
including gifts and contributions, are excluded from BPOL taxation by virtue of its relationship to its
member. Under federal and Virginia income tax laws, the income of a domestic SMLLC may be
considered the same as the income of its owner.[11] By default, domestic SMLLCs are characterized as
"disregarded entities" for federal income tax purposes.[12] According to the Internal Revenue Service (IRS),
contributions to a disregarded SMLLC that was created or organized in or under the laws of the United
States, a United States possession, a state, or the District of Columbia, and that is wholly owned and
controlled by a United States charity, will be treated as charitable contributions to the charitable
organization.[13]

Applying a similar rationale to the BPOL tax exclusions, the receipts of a disregarded SMLLC
should be treated as the receipts of its sole member and are excluded from BPOL tax to the extent
permitted by § 58.1-3703(C)(18).[14] Whether and to what extent the receipts of a member organization
qualify for exclusion from BPOL taxation under § 58.1-3703(C)(18) are questions left for your
determination.[15]

Conclusion
Accordingly, it is my opinion that property owned by a single member limited liability company
(SMLLC) that does not independently qualify as an "institution of learning not conducted for profit" is
not eligible for the tax exemption set out in § 58.1-3606(A)(4), even if the sole owner of the SMLLC is a
non-profit corporation operating as an institution of learning. Further, it is my opinion that certain
receipts, including gifts and contributions, of a domestic SMLLC that is classified as a disregarded entity
for federal income tax purposes and solely owned by a charitable organization that qualifies for charitable
deductions under the Internal Revenue Code, may be excluded from BPOL taxation, if you determine that
the applicable requirements of § 58.1-3703(C)(18) have been satisfied.
With kindest regards, I am,

Very truly yours,

Mark R. Herring
Attorney General

1. This opinion is limited in scope to domestic single member limited liability companies organized and existing under the Virginia Limited Liability Company Act (VA. CODE ANN. § 13.1-1000-1087) and does not apply to other forms of ownership, including, but not limited to, a land trust utilized solely as a means to hold and dispose of real property.

2. VA. CODE ANN. § 58.1-3606(A)(4) (2017); see also generally VA. CONST. art. X, § 6(a)(4).

3. See Hagan v. Adams Prop. Assocs., 253 Va. 217, 220, 482 S.E.2d 805, 807 (1997); Jordan v. Commonwealth, 36 Va. App. 270, 274, 549 S.E.2d 621, 622-23 (2001).

4. VA. CODE ANN. § 13.1-1009 (2016).

5. VA. CODE ANN. § 13.1-1021 (2016).

6. See Jeb Stuart Auction Servs., LLC v. W. Am. Ins. Co., 122 F. Supp. 3d 479, 484 (W.D. Va. 2015) (stating that "[t]he LLC structure would have no meaning if single-member LLCs were one and the same with the single member").

7. VA. CONST. art. X, § 6(f). Property that was exempt from taxation under § 58-12, predecessor statute to § 58.1-3606, as of the effective date of the 1971 Constitution of Virginia may be grandfathered under a liberal rule of construction. See VA. CODE ANN. § 58.1-3606(B); 2011 Op. Va. Att'y Gen. 197, 200. For purposes of this opinion, however, I assume your question pertains to property that does not implicate the grandfather provision, particularly because the General Assembly did not enact legislation allowing for the creation of LLCs and SMLLCs until well after the effective date of the 1971 Constitution.

8. Smyth Cty. Cmty. Hosp. v. Town of Marion, 259 Va. 328, 333, 527 S.E.2d 401, 403 (2000).

9. 2002 Op. Va. Att'y Gen. 331, 335.

10. VA. CODE ANN. § 58.1-3703(C)(18) (2017).

11. Nahigian v. Juno-Loudoun, LLC, 677 F.3d 579, 591 n.8 (4th Cir. 2012). See also 26 C.F.R. § 301.7701-3 (stating that, absent an election, a limited liability company is disregarded as an entity separate from its owner if it has a single owner); VA. CODE ANN. § 58.1-390.1 (2017) (recognizing that a limited liability company may qualify as a pass-through entity if its members "report their share of the income, gains, losses, deductions and credits from the entity on their federal income tax returns").

12. 26 C.F.R. § 301.7701-2, -3. An SMLLC may elect to be classified as a corporation for federal income tax purposes. Where such an election is made by the taxpayer, the SMLLC will pay federal income taxes as an association. See 26 C.F.R. § 301.7701-3(a).

13. Notice 2012-52, 2012-35 I.R.B. 317. The notice encourages disclosure to the Internal Revenue Service that the SMLLC is wholly owned by a United States charity and is treated by this United States charity as a disregarded entity.

14. This would not be the case if the SMLLC elects to be classified as a corporation for federal income tax purposes or if the SMLLC does not meet the requirements set out in Internal Revenue Service Notice 2012-52, 2012-35 I.R.B. 317.

15. Section 58.1-3703(C)(18)(a) applies a BPOL exclusion to "receipts of a nonprofit organization described in Internal Revenue Code § 501(c)(3) or 501(c)(19), except to the extent the organization has receipts from an unrelated trade or business the income of which is taxable under Internal Revenue Code § 511 et seq." Section 58.1-3703(C)(18)(a) further limits the exclusion for institutions of learning exempt from federal income tax under Internal Revenue Code § 501(c)(3) to "schools, colleges, and other similar institutions of learning." In order to qualify for this exclusion, the non-profit organization must be one whose contributions are deductible by the contributor under Internal Revenue Code § 170. Section 58.1-3703(C)(18)(b) applies a BPOL exclusion to "gifts, contributions, and membership dues" received by a non-profit organization exempt from federal income tax under Internal Revenue Code § 501, "other than the nonprofit organizations described in subdivision a," and "[a]ctivities conducted for consideration that are similar to activities conducted for consideration by for-profit businesses shall be presumed to be activities that are part of a business subject to licensure." Whether an organization qualifies for exclusion of some or all of its receipts, gifts, and contributions from BPOL taxation under subdivision (a) or (b) is a question of fact that you must determine on a case-by-case basis.